“CLOs are trying to find a new, more cost-effective and efficient balance of resources,” said Altman Weil principal Daniel DiLucchio, who conducted the survey. “They are reformulating the mix of in-house lawyers and staff, outside law firms, new technology tools and non-law-firm vendors in order to deliver quality and value to their corporate client.”

Cost control

The survey found that 78.5 percent of CLOs negotiate price reductions from outside counsel to control costs. Almost half of law departments receive an average reduction of 6 percent to 10 percent. Twenty percent of departments have negotiated discounts of between 11 percent and 15 percent, and 19 percent of departments get average price cuts of between 1 percent and 5 percent.

When offered four possible law firm pricing options, 36 percent of CLOs said they wanted “transparent pricing” in which they understand how and why the price is set and have the opportunity to discuss changes. One-third of CLOs chose “guaranteed pricing” as their preference; and 20 percent opted for “value-based pricing” that varies based on results. Only 9.6 percent of chief legal officers say they wanted the “lowest price” available.

DiLucchio said the findings are “very striking.”

“If a rate discount is the only thing offered, law departments will certainly take it, but chief legal officers are saying what they really want is predictability and control,” he said.

A new balance of resources

The survey reports 42 percent of corporate law departments plan to add in-house lawyers in the next 12 months, compared to only 5.4 percent planning a decrease. Meanwhile, 29 percent plan to decrease their use of outside counsel while only 15 percent plan an increase. Of those planning to decrease their use of outside counsel, 82 percent say they will shift the work to in-house legal staff.

As part of efforts to control costs, law departments report an array of efforts to move work from higher to lower-priced resources. Along with shifting work from law firms to in-house lawyers, corporate law departments are also shifting law firm work to lower-priced firms, reducing the overall amount of work given to outside counsel, shifting in-house work from lawyers to paraprofessionals, using contract lawyers, using technology tools to increase efficiency and outsourcing to non-law-firm vendors.

Reflecting these shifts, 47 percent of law departments surveyed report they decreased their outside counsel budget in 2013. That number represents an 8 percent jump among of departments that reported decreasing their outside counsel spend in last year’s survey, and 25 percent that did so in 2011.

Inside-outside relationship

When asked to select the service improvements and innovations they would most like to see from their outside counsel, three of the top four CLO responses involved costs and pricing. Their first choice for change in law firm services was improved budget forecasting, followed by greater cost reduction, more efficient project management and non-hourly based pricing structures.

However, CLOs appear to have little hope that law firms will rise to the challenge.

For the fifth straight year, the survey asked CLOs to rate how serious law firms are about changing their legal service delivery model to provide greater value — and for the fifth year, the median rating was a 3 on a scale of 0 (not at all serious) to 10 (doing everything they can).

To balance the picture, CLOs were also asked how much pressure corporations are putting on law firms to change the value proposition. CLOs rated themselves at a median 5 on the scale, as they have for four of the last five years.

“After five years of similar responses to this pair of questions, it’s seems pretty clear that chief legal officers have decided to tackle these problems themselves, rather than rely on outside counsel to partner with them on change,” DiLucchio said.